The likely effects of the Iran war on the global energy transition

This note presents initial thinking from DNV’s Energy Transition Outlook research team on the implications of the war in Iran for the global energy system and the energy transition. We cannot predict when this destructive war, which began on 28 February, will definitively end.

What is already clear is that the conflict is inflicting devastating human consequences, causing widespread death, injury, and suffering for people across the region from an energy system perspective, its immediate impacts are enormous, and its long-term consequences for the oil and gas industry, regional and global economies, and on the pace of the energy transition will be significant. 

Key takeaways

• Without knowing the duration and possible escalation of the conflict, it is clear that restoring production will take time; restoring trust even longer. It is likely that the world will therefore see elevated oil and gas prices for a long time. 
• The present fossil supply shock disproportionately affects Asia, but all energy importing countries will suffer, and their motivation to make themselves less dependent on oil and gas imports will rise. 
• The transition has gained strategic urgency, but it is not cost‑free. Higher interest rates will raise capital costs, and diversification takes time, but energy security concerns will ultimately strengthen the pull toward renewables and nuclear. 

Historic disruption with long-term consequences for fossil markets 

Iran’s forced closure of the Strait of Hormuz on 4 March created the biggest oil and gas supply shock in the history of the industry. As widely reported, about 20% of the world’s shipments of oil and natural gas normally pass through the strait, with over 80% of these shipments bound for Asian markets. This has, as of the date of writing, been reduced to a mere trickle favouring nations friendly to Iran. The short-term consequences are worst in countries with low oil and gas stocks and a weak ability to pay high spot prices, such as Pakistan, Bangladesh, and Sri-Lanka. 

The oil market was not tight before the war and a global gas glut was expected this year, but with Saudi Arabia and Qatar now hobbled by the war, no alternative large swing producer is able to cover the shortfall in the short or medium term. Russia, now acting under a temporary waiver of sanctions by the US, will look to fill some of the gap, but its own production amounts to only 4% of global crude oil and around 15% of natural gas production, with limited LNG export capacity. The US was already planning to significantly boost LNG export volumes, but not at the amounts and timing now required. Moreover, a high export spot price for LNG places pressure on the domestic price of natural gas, and high domestic oil and gas prices are deeply unpopular among voters and pose a severe test ahead of the upcoming mid-term elections in the US.  

Despite some pronouncements of an imminent peace, this may well not happen, and the possibility for rapid re-escalation from any of the combatant nations means that there is considerable downside risk of further damage to energy production and export facilities in the region, including Iran’s own. The process of repair and restoration will be fragile and slow: already more than 40 critical infrastructure facilities have been damaged, and some of these may take years to repair.  

Additionally, Iran’s control over the Strait of Hormuz will introduce a permanent risk premium for the Gulf. If the US does withdraw, there is also no guarantee that Iran will release its chokehold on the strait if its various demands remain unmet.  

With all these factors taken into account, it is likely that the world will see elevated oil and gas prices for a long time. 

A war sending shockwaves through regional and global markets 

The economic fallout from the war has already stoked inflation, and interest rate hikes and reductions in GDP are expected. The severity of these effects will depend on the duration of the war. With the supply of LNG and crude oil cut short, and as a lengthy period of elevated prices settles in, demand will necessarily suffer. A great deal of economic activity is dependent on oil and gas, including fertilizer production, which holds severe additional consequences for global agriculture production.  

Global shipping is significantly affected, with thousands of ships trapped in the Gulf or rerouted around Africa. Fuel oil prices and insurance costs are spiking, leading to soaring costs for all charters, not only for oil and gas transport. Aviation will take a triple hit, from increased cost, increased uncertainty, and from direct hits to key hubs in the Gulf. 

It is difficult to say with certainty what the effect of hostilities so far will be on global GDP; while global growth is negatively correlated with rising oil and gas prices, heightened economic activity associated with arms production and damage repair could partly mitigate the recessionary trend. However, most Middle Eastern countries will take a severe economic hit, not only through direct damage, but also through the evaporation of confidence in the Gulf as a haven for economic and tourist activity. 

Oil and gas exporting countries outside the Gulf will benefit, although these benefits will not necessarily be felt by citizens paying high prices at petrol and diesel pumps. Russia is likely to avoid deep discounts on its oil and gas exports for a while, and although volumes are not likely to change much, higher prices will add to its war chest. Import countries will suffer proportionally, with the worst consequences for low- and medium-income countries which cannot afford to pay elevated oil and gas prices. China, in the short term, will also be paying more, but as explained below, its industries will benefit. 

The global energy transition will accelerate

As we stated in our latest Energy Transition Outlook (October 2025) our forecast model shows that when there is heightened focus on energy security, the pace of the global energy transition speeds up. That is because the net effect of energy security policies globally favours renewables, batteries, nuclear, and energy efficiency.  

The rule-of-thumb that what is bad for fossils is good for renewables applies. And the Middle East conflict is definitely bad for oil and gas. It is clearly strengthening energy security as a primary global concern because it has once again exposed, dramatically, the vulnerability of many countries to oil and gas dependency. Even an early ‘normalization’ of oil and gas supply and prices would not change this perspective.  

While the present fossil supply shock disproportionately affects Asia, all energy importing countries will suffer, and their motivation to make themselves less dependent on oil and gas imports will rise. We note that Chinese battery manufacturers have gained more than international oil and gas companies on stock exchanges over the last three weeks. That is a signal of what long-term money is betting on – certainly on a more rapid uptake of EVs amidst high oil prices, but also on utility storage for grid stability as the renewables buildout accelerates. However, we remind readers that the energy transition is a long-term play – even with the boost to renewables from the present conflict, diversifying any nation’s energy system takes time. Changing a nation’s energy mix also requires investments, and higher interest rates will make the considerable upfront capital required for renewables and power grids more expensive. Thus, while the present conflict is likely to ultimately favour decarbonization, it is not a one-way street.  

This supply shock comes at a time where oil and gas dependency around the world is still very high. But the transition is ongoing, and if a similar supply shock were to happen in 10 years, we would see many countries’ power, road mobility, and building heating sectors being much less exposed to fossil supply shocks. Instead, national reserves can be prioritized for still vital oil and gas consumers like aviation, shipping, and heavy industry.  

DNV expects that despite tighter budgets and an inflationary environment that militates against CAPEX spending, energy security concerns will inevitably pull even more strongly in favour of renewables, batteries, and nuclear going forward. While the full extent of this is not yet understood, it will be closely followed and analysed by our forecasting team in the coming months.